Current spikes in spot-market CNG prices not an issue for most fleets

Most of the recent spot-market price spikes are unlikely to affect fleets that purchase CNG fuel from a local utility

Recent reports in the general media of spikes in the price of compressed natural gas (CNG) for use as a vehicle fuel are not indicative of inherent price volatility or a long-term upward cost trend for this increasingly popular alternative power source for fleets, according to Gladstein, Neandross & Associates (GNA), a Santa Monica,CA-based clean-transportation/energy consultancy.

“The Midwest and Northeast are experiencing exceptionally frigid weather this winter and this phenomenon has led to a spike in the cost of CNG in a few congested areas,” Patrick Couch, GNA technical project director, told FleetOwner.

“And that’s causing speculation regarding the volatility and long-term pricing trends for this alternative fuel,” he continued. “GNA’s technical consulting team has received a flood of questions from our fleet clients about how these spikes might impact future fuel costs for their operations.”

But, according to Couch, the CNG price spikes that are being reported are primarily related to pipeline congestion in major metropolitan areas and are generally confined to the spot market— so they are not a warning sign of overall price trends.

“The spot market is the place where large industrial-gas customers typically go to buy natural gas on a last minute basis,” Couch explained. “These buyers, including power plants, have been using much more fuel for heating and generating electricity and had not reserved sufficient pipeline capacity to cover their immediate needs” during this winter’s extended cold snaps.

“In the current high-demand market with little available pipeline capacity in the Northeast and Midwest, spot-market prices have soared to 20 times the Henry Hub price [the baseline for natural-gas futures on the New York Mercantile Exchange] for these last minute purchases,” he pointed out.

“If these price increases were due to fundamental shortages of natural gas in the U.S., then we’d see similar dramatic increases in CNG prices at Henry Hub and in regions other than the Northeast and Midwest,” Couch elaborated. “Most of the spot-market pricing is unlikely to affect fleets that are purchasing CNG from their local utility.”

For example, he related that a distribution-fleet client of GNA based in Montgomery, IL, that runs CNG trucks fueled via the local utility, Nicor, is buying its fuel for far less than the spot-market rate in their operating area.

“A quick look at their current cost of gas shows a price for January of about $4.60/mmBTU [$4.60 per million BTU],” Couch reported. “That’s well below the [local] average spot price of $41.31/mmBTU recorded one day last month-- and about half of the January average spot price of $8.38/mmBTU.”

It should be noted that per-million-BTU pricing is the unit used for long-term contracts and fuel futures. “Most of the fleet buyers will want to figure out the ‘pump’ price for CNG, which is usually expressed Diesel Gallon Equivalent (DGE) or Gasoline Gallon Equivalent (GGE),” points out Couch.

“To do the math from mmBTU to DGE as a commodity,” he continues, “the conversion is roughly 7 to 1—so you’d divide the mmBTU price by 7. That will give you the commodity cost in DGE and to that would be added the retail overhead etc. by the fueling station supplying it. The DGE pump price is usually three times the commodity price.”

Couch emphasizes that “the bottom line is that this is a short-term price spike that won’t significantly affect fleet customers with longer-term fuel price contracts or that purchase CNG through local utilities.

“Looking further out at the long term, the discussion in the oil & gas industry is that over the next five years,” he adds, “the natural gas commodity price will probably stabilize around $5-$7/mmBTU.”

Meanwhile, a trio of bills introduced just last week in the U.S. House of Representatives would improve the ability of long-haul fleets to access natural gas as a fuel.

Co-sponsors Rep. Lee Terry (R-NE) and Rep. Sam Graves (R-MO) stated that the legislative proposals are “aimed at making it safer, more convenient, and more cost-effective for trucking transportation companies to use natural gas when transporting goods across the country.”

Allow an exemption from the current truck weight limit solely for the purpose of the weight of the natural gas tank, so that trucks using the fuel are not at a disadvantage

Establish a task force among the Departments of Energy and Commerce, the Environmental Protection Agency (EPA), members of Congress, state government, and private sector representatives to evaluate barriers to transition from diesel fuel to natural gas, as well as the costs and benefits of using natural gas in trucks and what such a switch could mean for the Highway Trust Fund. The task force would produce a report within 120 days of the bill becoming law

“I have been and will continue to be a strong advocate for diversifying our nation's energy supply," said Rep. Terry. "On a recent trip to the Baaken, I witnessed first-hand our abundant supply of natural gas being flared because it's cheaper to burn than it is to capture. With this plentiful resource, I'm convinced that we can and must expand natural gas use in transportation.

“Learning everything we can about barriers to natural gas use and removing those barriers should be common sense in our quest for an all-of-the-above energy strategy,” he continued.

“America is rich in natural gas resources, as we’ve seen in recent years with the shale gas revolution,” said Rep. Graves, who chairs the small Business Committee. “Natural gas is more cost-efficient than diesel, meaning consumers will feel the savings when shopping at WalMart and Hy-Vee. It also has the ability to substantially reduce emissions.

“Utilizing natural gas in the long-haul trucking industry just makes sense,” he added. “These bills provide the tools necessary to make sure companies looking to use natural gas are not at a disadvantage.”